Nine wealth views on the 'unreliable boyfriend' at the BoE

Ben Bernanke's inclination to ease was so strong that it created the legend of the Bernanke Put. Mark Carney's commitment to his always-coming, ever-delayed rate rise is so flaky it has earned him a rep as the 'unreliable boyfriend'.

With rates again on hold today - after a rise was considered a near certainty as recently as three months ago - we asked our readers how they are managing the phantom of higher borrowing costs

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Caroline Simmons

A string of disappointing data in recent weeks made it hard for the Bank of England (BoE) to justify a hike. GDP figures disappointed and the latest credit data from the Bank of England was weak.

But this doesn’t necessarily mean a rate hike is off the cards for the foreseeable future. We should keep an open mind about how the data evolves.

While the Bank of England’s announcements will be data dependent, there is still a sense that policy is too loose, given the supply potential of the economy, so rates may move gradually higher over the medium term. This is consistent with the projections from the February Inflation Report.

For those wanting to benefit from potential rate rises, we advise looking for companies with strong balance sheets and exposure to global growth, which look set to perform well in an environment of higher rates.

Higher interest rates may lead to higher borrowing costs for companies and consumers, so companies with less debt burden will start to look attractive.

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Dan Cartridge

Fund analyst, Hawksmoor Investment Management, Exeter

We do not position our Vanbrugh and Distribution funds to benefit from binary events such as whether a central bank will raise rates. However, we are cognisant of the effect that rising rates can have on our investments.

Higher interest rates increase the cost of capital for businesses and place greater strain on companies to service their debts, raising the risk of default. Property exposure accounts for 19% of Distribution and 11% of Vanbrugh.

We are careful to look at the leverage employed by our Reits and prefer them to have fixed rate long term debt. For example, LXi Reit, which holds a diversified portfolio of long lease UK property and is owned in both funds, last year negotiated a 12-year debt facility with an all in fixed cost of 2.93%, against the portfolio yield of over 6%. This offers an attractive margin of safety against rising interest rate risk.

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Ahmer Tirmizi

Investment manager, Seven Investment Management, London

The forces that led to interest rates falling to record lows are reversing. We’re now in a world of high employment, fiscal easing and synchronised growth – acting to push up interest rates. Even so, apart from in the US yields, global rates remain below reasonable expectations for inflation.

In other words, investors are buying assets that are guaranteed to lose money in inflation-adjusted terms. For instance, buying a long-term UK inflation-linked bond is likely to halve your money in real terms by the time it matures.

Investors’ pessimistic expectations since the financial crisis have justified accepting a real loss on fixed income. We think belief in the 'new normal' narrative is misplaced.

As a result, we are underweight interest rate exposure. Being underweight bonds leaves us with a large hole to fill – stable returns and risk mitigation. We fill this with a combination of alternatives, such as infrastructure, gold and alternative risk premia. We also use put options to mitigate equity risk.

Leave a comment!

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James Burns

Co-manager of Smith & Williamson’s managed portfolio service, London

Our view for some time has been that any rise in interest rates will be driven by inflation picking up. For this reason we have preferred index-linked bonds over conventional government bonds. The sheer volume of money that has been printed through global QE is likely to eventually manifest itself in higher inflation levels.

While there has been no inflation time-bomb yet, we still believe that it makes sense to maintain exposure in client portfolios as history dictates that we won’t know inflation has taken hold until it is too late.

However, in recent months we have shifted our exposure from primarily the UK to more of a global stance, reflecting the drag on the economy that Brexit is having.

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Nathan Sweeney

Senior investment manager, Architas, London

Over the course of the last year, we have been rotating portfolios out of defensive equity income funds. These funds invest in lots of bond proxies, which have a tendency to underperform in a rising rate environment.

Given the clear guidance from the US Federal Reserve that it will raise rates, and the potential for the many other developed market central banks to follow suit, we have been making the switch from interest rate sensitive equity funds to funds with a focus on quality growth. We have been doing this in both the UK and the US.

An example of this is the TB Evenlode Income fund. This fund focuses on companies that deliver solid earnings and have strong balance sheets, and also tend to have low debt and strong cashflow.

A fund with this focus will tend to fare better in a rate rising environment. Companies with higher debt will be shunned as the cost of refinancing increases with rising rates.

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Neil Whelan

In order to accommodate our outlook for interest rates, our client portfolios are positioned towards the lower end of their agreed fixed income allocation range.

Furthermore, the exposure here has gradually been moved to a shorter duration position, formed through a combination of directly held gilts and passive credit holdings.

We have a corresponding overweight position in real assets, and equities in particular, as we feel the combination of a yield premium and good potential for dividend growth is a compelling one in a reflationary environment.

If changes in market expectations were to lead to yield curves steepening such that it was possible to generate a positive real yield from higher quality fixed income securities, this would likely be a catalyst for us to reassess this position.

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Don Smith

We view the current upward trend in interest rates as a reaction to a strong global economic upswing which does not carry a significant threat of generating destabilising credit bubbles.

With global inflation pressure still weak, we expect the rise in yields through much of the world is likely to occur more gradually than we are seeing in the US. Thus interest rate risk is not extremely high in this environment but even so, we lean towards lowering our interest rate exposure across our diversified multi-asset funds.

We think it sensible to underweight fixed income holdings – mainly government rather than corporate debt – as well as lowering asset duration. In equitie,s this is mainly through a modest rebalancing our exposure away from higher-duration growth stocks towards value-stocks.

We also view the environment as generally favourable for more cyclical sectors – banks in particular, and commodities-related basic industries.

Leave a comment!

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Robin Kyle

Rising interest rates have been a topic of discussion among investors for some time and, with every passing quarter, the dynamic becomes more interesting.

Rate hikes will be accompanied by a withdrawal of liquidity (quantitative tightening) and in a market where valuations have outstripped fundamentals, there will be consequences.

Inflation that is temporarily above target in the UK and stubbornly below target in Europe, dictates that any activity has been at the margins.

By contrast, every expectation surpassing data release in the US bolsters the argument for tighter policy, while Trump’s tax cuts - the fifth largest stimulus package of the last 60 years - may also force the Fed into hiking rates more quickly than envisaged.

Against this backdrop, asset allocation in client portfolios has adopted a defensive tilt. Fixed income exposure is selective and short duration, while equities focus on those areas where valuations reflect underlying fundamentals.

We also have positions in uncorrelated alternatives, including explicit protection strategies, to combat the furore that is sure to accompany any departure from central bank guidance!

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Richard Carter

Head of fixed interest research, Quilter Cheviot

We have been considering the impact of higher interest rates on portfolios for some time. First and foremost, it has been a US phenomenon, reflecting a strong economy, full employment and a pickup in wage growth.

By contrast, interest rates do not look like rising in the eurozone any time soon, as the Bank of England has now got cold feet over a May rate hike.

In general, we felt that equities would outperform bonds as the Fed tightened and this has been the case, despite some recent volatility. Within equities, we have tended to favour companies leveraged to strong global growth, as well as banks, while we have been cautious about the so-called bond proxies such as utilities.

Within bonds, we have been underweight duration and have preferred to use an exposure to gold as our main hedge against nasty surprises.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Ben Bernanke's inclination to ease was so strong that it created the legend of the Bernanke Put. Mark Carney's commitment to his always-coming, ever-delayed rate rise is so flaky it has earned him a rep as the 'unreliable boyfriend'.

With rates again on hold today - after a rise was considered a near certainty as recently as three months ago - we asked our readers how they are managing the phantom of higher borrowing costs

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Ben Bernanke's inclination to ease was so strong that it created the legend of the Bernanke Put. Mark Carney's commitment to his always-coming, ever-delayed rate rise is so flaky it has earned him a rep as the 'unreliable boyfriend'.

With rates again on hold today - after a rise was considered a near certainty as recently as three months ago - we asked our readers how they are managing the phantom of higher borrowing costs

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Caroline Simmons

A string of disappointing data in recent weeks made it hard for the Bank of England (BoE) to justify a hike. GDP figures disappointed and the latest credit data from the Bank of England was weak.

But this doesn’t necessarily mean a rate hike is off the cards for the foreseeable future. We should keep an open mind about how the data evolves.

While the Bank of England’s announcements will be data dependent, there is still a sense that policy is too loose, given the supply potential of the economy, so rates may move gradually higher over the medium term. This is consistent with the projections from the February Inflation Report.

For those wanting to benefit from potential rate rises, we advise looking for companies with strong balance sheets and exposure to global growth, which look set to perform well in an environment of higher rates.

Higher interest rates may lead to higher borrowing costs for companies and consumers, so companies with less debt burden will start to look attractive.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Dan Cartridge

Fund analyst, Hawksmoor Investment Management, Exeter

We do not position our Vanbrugh and Distribution funds to benefit from binary events such as whether a central bank will raise rates. However, we are cognisant of the effect that rising rates can have on our investments.

Higher interest rates increase the cost of capital for businesses and place greater strain on companies to service their debts, raising the risk of default. Property exposure accounts for 19% of Distribution and 11% of Vanbrugh.

We are careful to look at the leverage employed by our Reits and prefer them to have fixed rate long term debt. For example, LXi Reit, which holds a diversified portfolio of long lease UK property and is owned in both funds, last year negotiated a 12-year debt facility with an all in fixed cost of 2.93%, against the portfolio yield of over 6%. This offers an attractive margin of safety against rising interest rate risk.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Ahmer Tirmizi

Investment manager, Seven Investment Management, London

The forces that led to interest rates falling to record lows are reversing. We’re now in a world of high employment, fiscal easing and synchronised growth – acting to push up interest rates. Even so, apart from in the US yields, global rates remain below reasonable expectations for inflation.

In other words, investors are buying assets that are guaranteed to lose money in inflation-adjusted terms. For instance, buying a long-term UK inflation-linked bond is likely to halve your money in real terms by the time it matures.

Investors’ pessimistic expectations since the financial crisis have justified accepting a real loss on fixed income. We think belief in the 'new normal' narrative is misplaced.

As a result, we are underweight interest rate exposure. Being underweight bonds leaves us with a large hole to fill – stable returns and risk mitigation. We fill this with a combination of alternatives, such as infrastructure, gold and alternative risk premia. We also use put options to mitigate equity risk.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

James Burns

Co-manager of Smith & Williamson’s managed portfolio service, London

Our view for some time has been that any rise in interest rates will be driven by inflation picking up. For this reason we have preferred index-linked bonds over conventional government bonds. The sheer volume of money that has been printed through global QE is likely to eventually manifest itself in higher inflation levels.

While there has been no inflation time-bomb yet, we still believe that it makes sense to maintain exposure in client portfolios as history dictates that we won’t know inflation has taken hold until it is too late.

However, in recent months we have shifted our exposure from primarily the UK to more of a global stance, reflecting the drag on the economy that Brexit is having.

Leave a comment!

Nathan Sweeney

Senior investment manager, Architas, London

Over the course of the last year, we have been rotating portfolios out of defensive equity income funds. These funds invest in lots of bond proxies, which have a tendency to underperform in a rising rate environment.

Given the clear guidance from the US Federal Reserve that it will raise rates, and the potential for the many other developed market central banks to follow suit, we have been making the switch from interest rate sensitive equity funds to funds with a focus on quality growth. We have been doing this in both the UK and the US.

An example of this is the TB Evenlode Income fund. This fund focuses on companies that deliver solid earnings and have strong balance sheets, and also tend to have low debt and strong cashflow.

A fund with this focus will tend to fare better in a rate rising environment. Companies with higher debt will be shunned as the cost of refinancing increases with rising rates.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Neil Whelan

In order to accommodate our outlook for interest rates, our client portfolios are positioned towards the lower end of their agreed fixed income allocation range.

Furthermore, the exposure here has gradually been moved to a shorter duration position, formed through a combination of directly held gilts and passive credit holdings.

We have a corresponding overweight position in real assets, and equities in particular, as we feel the combination of a yield premium and good potential for dividend growth is a compelling one in a reflationary environment.

If changes in market expectations were to lead to yield curves steepening such that it was possible to generate a positive real yield from higher quality fixed income securities, this would likely be a catalyst for us to reassess this position.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Don Smith

We view the current upward trend in interest rates as a reaction to a strong global economic upswing which does not carry a significant threat of generating destabilising credit bubbles.

With global inflation pressure still weak, we expect the rise in yields through much of the world is likely to occur more gradually than we are seeing in the US. Thus interest rate risk is not extremely high in this environment but even so, we lean towards lowering our interest rate exposure across our diversified multi-asset funds.

We think it sensible to underweight fixed income holdings – mainly government rather than corporate debt – as well as lowering asset duration. In equitie,s this is mainly through a modest rebalancing our exposure away from higher-duration growth stocks towards value-stocks.

We also view the environment as generally favourable for more cyclical sectors – banks in particular, and commodities-related basic industries.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Robin Kyle

Rising interest rates have been a topic of discussion among investors for some time and, with every passing quarter, the dynamic becomes more interesting.

Rate hikes will be accompanied by a withdrawal of liquidity (quantitative tightening) and in a market where valuations have outstripped fundamentals, there will be consequences.

Inflation that is temporarily above target in the UK and stubbornly below target in Europe, dictates that any activity has been at the margins.

By contrast, every expectation surpassing data release in the US bolsters the argument for tighter policy, while Trump’s tax cuts - the fifth largest stimulus package of the last 60 years - may also force the Fed into hiking rates more quickly than envisaged.

Against this backdrop, asset allocation in client portfolios has adopted a defensive tilt. Fixed income exposure is selective and short duration, while equities focus on those areas where valuations reflect underlying fundamentals.

We also have positions in uncorrelated alternatives, including explicit protection strategies, to combat the furore that is sure to accompany any departure from central bank guidance!

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Richard Carter

Head of fixed interest research, Quilter Cheviot

We have been considering the impact of higher interest rates on portfolios for some time. First and foremost, it has been a US phenomenon, reflecting a strong economy, full employment and a pickup in wage growth.

By contrast, interest rates do not look like rising in the eurozone any time soon, as the Bank of England has now got cold feet over a May rate hike.

In general, we felt that equities would outperform bonds as the Fed tightened and this has been the case, despite some recent volatility. Within equities, we have tended to favour companies leveraged to strong global growth, as well as banks, while we have been cautious about the so-called bond proxies such as utilities.

Within bonds, we have been underweight duration and have preferred to use an exposure to gold as our main hedge against nasty surprises.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

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